China drastically cuts Russian ESPO crude purchases

Coronavirus is adding to an economic slowdown forcing Chinese refiners to reduce consumption of their favourite oil blend

China drastically cuts Russian ESPO crude purchases
Photo: Otebig

Industrial turmoil in China is likely to cause a substantial decrease in the country’s crude oil imports, consider the industry’s analysts. Local refiners promised to respect their term purchase contracts for 2020, while spot oil purchases are expected to be significantly affected by the crisis.

Far East Russian crude oil is likely to bear the brunt of China’s economic slowdown aggravated by the coronavirus outbreak, says S&P Global Platts adding that both state-run and private Chinese refiners are poised to cut imports of their favourite feedstock ESPO Blend crude. According to a senior trading manager at China’s Sinopec, the refiner is supposed to cut spot crude purchases due to a sharp decrease in domestic oil demand caused by a halt in industrial, manufacturing and construction activities. Sinopec refineries across China are currently operating at minimum run rates.

Another state-owned refiner PetroChina also saw a sharp decline in throughput levels last week. The company will adjust crude import plan amid high inventory, said an the company’s unnamed source. As for independent refineries, they “got hit the hardest this time around, with their utilisation rates slashed and operations shut down for some”, considers head of S&P Global Platts Analytics Asia Kang Wu. For example, independent refiners in Shandong province have reduced their average run rate by more than 17% since mid-January.

Russian oil tanks at rail station. Photo: sergejf

In 2019, China imported 10,16 million bpd of crude, reads data from the country’s General Administration of Customs. Analysts estimate that throughput cuts could lead to an overall import reduction of around 1,8-2 million bpd of crude oil. Russian ESPO Blend crude appears to be extremely vulnerable to declining Chinese demand, as it has been the country’s number one feedstock choice in the spot market over the past years.

“ESPO is now pricing in substantial concerns about oil demand destruction and consequently steep crude run cuts in China due to the coronavirus epidemic,” commented Oil Markets Adviser at Platts Analytics JY Lim. Last week, ESPO price differential against Platts Dubai dropped to a 6-month low. The possibility of additional cuts depends on when the coronavirus is controlled and when the number of confirmed cases reaches the peak, believe market analysts.

At the same time, China’s state-run refiners said they would fully respect their term purchase contracts for 2020. OPEC’s kingpin Saudi Arabia, which supplies crude to Asia largely through term contracts, is thus likely to maintain its status of China’s top crude oil supplier. China’s crude imports from Saudi Arabia reached 1,67 million bpd last year, up 46,9% compared to a year earlier.

By Anna Litvina